Europe's Farm Subsidies

The European Union has announced plans to reform its Common Agricultural Policy - its most expensive scheme, and one of the most controversial. The CAP cost 58bn euros (£51bn; $80bn) last year - 47% of the whole EU budget.

The European Commission does not want to cut the budget, but change its priorities - including linking direct payments to environmental measures.

I find this fascinating, for a couple of reasons. First, amidst all of the current discussion about the merits of additional fiscal federalism in the EU -- i.e. whether increasing the independent taxation and spending power of the EU might be the best way to deal with the ongoing eurozone crisis -- this serves as an important reminder of the current state of affairs in that regard. The EU does have its own budget, and does get to spend money on EU-wide priorities. The problem is that its budget is very small: only about €140 billion in 2011 for the entire 500 million people in the EU -- roughly the same as government spending in Denmark alone (population 5 million). And of that tiny budget, almost half is devoted to agricultural subsidies.

Given such a small budget to begin with, it has always seemed very odd that so much of it is consumed by subsidies to farmers. And the EU is apparently a bit self-conscious about that fact: farm subsidies are described as spending for the "preservation and management of natural resources" in the EU's budget planning documents. (Note the reassuring green color on the pie chart.) And they rather defensively note in their FAQs that the share of the EU's budget that has been devoted to farm subsidies has been steadily falling.

Why have such large agricultural subsidies, then? There are several possible explanations, but I think that there are two that are the most important. First, they served as an important lubricant in the political process of getting everyone on board with the EU project. As economists say, they were an important side-payment made from some members of the EU to others to faciliate other agreements.

Second, I think it's reasonable to believe that there's a genuine value placed by many Europeans and their governments on farming villages, lifestyles, and countrysides. In other words, I think that many non-farmers in Europe reap positive externalities from the existence of their farming communities. So for better or worse, they're willing to pay subsidies to maintain them.

But that doesn't mean that the EU can't try to do a better job of marketing them. And I think that's what's going on here; the EU realizes that if it more explicitly ties these farm subsidies to environmental protection, they will be more defensible. And they're probably right. So whether you like this idea or not will probably depend largely on what you think "environmental protection" is really all about.

3 comments:

<span>Agreed. But it is not only about environmental protection. It is also about keeping low prices for important commodities and low inflation by the way. It is also about a safe supply of food and feed.</span>

The EU's farm subsidies are a legacy of deals made in the early 60s, when the European Communities were first formed. Wikipedia's authors explain it more clearly than I can.

"The creation of a common agricultural policy was proposed by the European Commission.[citation needed] It followed the signing of the Treaty of Rome in 1957, which established the Common Market. The six member states individually strongly intervened in their agricultural sectors, in particular with regard to what was produced, maintaining prices for goods and how farming was organised. This intervention posed an obstacle to free trade in goods while the rules continued to differ from state to state, since freedom of trade would interfere with the intervention policies. Some Member States, in particular France, and all farming professional organisations wanted to maintain strong state intervention in agriculture. This could therefore only be achieved if policies were harmonised and transferred to the European Community level. By 1962, three major principles had been established to guide the CAP: market unity, community preference and financial solidarity. Since then, the CAP has been a central element in the European institutional system.

The CAP is often explained[3] as the result of a political compromise between France and Germany: German industry would have access to the French market; in exchange, Germany would help pay for France's farmers

Regardless of how the EU markets them, CAP subsidies (and US farm subsidies) look pretty unfair to developing countries. Agricultural subsidies remain one of the biggest points of contention in the Doha Round.

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The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)